Kentucky

Ky. taxing method upheld

In a move that Kentucky officials say will save the commonwealth $25 million in liability for tax refunds, the Supreme Court ruled Monday that states will be allowed to continue a 90-year-old practice of not taxing the interest on in-state bonds while taxing residents on the interest on out-of-state bonds.

In a 7-2 decision, the court agreed to reverse an earlier decision by a Kentucky appeals court, which had declared unconstitutional the traditional practice of offering preferential tax treatment on bonds used to fund highway, school and other government projects.

The case stemmed from a lawsuit filed in 2003 by George and Catherine Davis of Jefferson County, who were taxed on bonds issued by another state.

The Davises maintained and a Kentucky appeals court agreed that the state's law violates the commerce clause of the U.S. Constitution by discriminating against interstate commerce. In overturning that decision, the Supreme Court addressed an issue that has gripped the $2.5 trillion municipal bond market; 41 states have laws similar to Kentucky's.

"For the better part of two centuries states and their political subdivisions have issued bonds for public purposes, and for nearly half that time some states have exempted interest from their state income taxes, which are imposed on bond interest from other states," Justice David Souter wrote in the majority opinion. "The question here is whether Kentucky's version of this differential tax scheme offends the commerce clause. We hold that it does not."

FROM SCOTUS BLOG:

• Today?s opinion by Justice Souter in Dept. of Revenue of Kentucky v. Davis (06-666) is now available here. Justice Stevens filed a concurring opinion. The Chief Justice and Justice Scalia filed opinions concurring in part. Justice Thomas filed an opinion concurring in the judgment. Justices Kennedy and Alito each filed dissents.

• Analysis: When does ?public purpose? justify protectionism?

THANKS to one of our readers for bringing this decision to our attention!  Your help in keeping the posts current make my job a whole lot easier.  mike